Subprime woes cut Central Pacific outlook

Central Pacific Financial Corp. said early Friday its fourth-quarter net income will plunge by up to 86 percent after it took a provision for loan and lease losses of as much as $34 million due to the dramatic downturn in California residential construction.

The parent of Central Pacific Bank is estimating earnings of 10 to 14 cents per diluted share for the quarter after accounting for the loan and lease provision as well as an unrelated after-tax loss of $1 million, or 4 cents a share, on the repositioning of a $119 million investment portfolio. Without those costs, the company would have earned 67 to 71 cents a share, Chief Financial Officer Dean Hirata said.

Full-year earnings are now expected to fall to between $1.75 and $1.79 a share, compared with $2.31 to $2.36 a share forecast in the third quarter, Hirata said. Four analysts surveyed by Thomson Financial before the announcement estimated earnings of 53 cents a share for the quarter. Three analysts forecast annual earnings per share of $2.13.

A year ago, the state's fourth-largest bank in terms of assets earned $19.4 million, or 63 cents a share, for the quarter.

"What investors are probably hoping for right now is these banks take meaningful provisions and build reserve levels to have a nice cushion for asset quality issues," said Brett Rabatin, an analyst for Nashville, Tenn.-based FTN MidWest Research who does not own Central Pacific shares.

"Right now, today, capital is probably the most important thing," he said.

Central Pacific's stock, which lost more than half its value in 2007, rose in afternoon trading Friday, a sign that investors were anticipating a loan loss provision for the quarter, said Rabatin, who forecast fourth-quarter earnings of 42 cents a share.

"There's a likelihood they will continue to have provisioning related to the housing market in California," Rabatin said. "It is going to take a few more quarters before the environment in some of these California markets has stabilized."

President and Chief Executive Clint Arnoldus said the company is anticipating a challenges in the market through this year.

"No one is really comfortable predicting when the bottom is going to hit," Arnoldus said in an interview. "It's got a while to run before we are going to be through this process with that market."

Arnoldus stressed in July that Central Pacific had no exposure to the subprime lending market, but the company quickly became affected by a crisis that swept financial institutions nationwide. The subprime downturn hurt the bank last quarter after national homebuilders unloaded California inventory at 10 percent to 30 percent discounts and local contractors to whom Central Pacific had provided loans were left without buyers.

Net income for the third quarter dropped 55.8 percent to $9.1 million, or 30 cents a share, compared with $20.6 million, or 67 cents a share, a year earlier, after the company took a $21.2 million provision for loan and lease losses.

Arnoldus said again Friday that the costs are limited to residential tract lending projects in California, adding that the Hawaii market "still looks very strong."

The company said it also expects to record $8.5 to $9 million in loan charge-offs, or loans charged against loss reserves for the quarter, which are posted on the balance sheet.

Central Pacific said it will maintain a quarterly dividend of 25 cents a share and continue efforts announced in July to buy back up to 1.5 million shares of its outstanding common stock.

Separately, Central Pacific sold $119 million in investment securities with an average yield of 3.98 percent and reinvested the proceeds in a similar number of new investment securities with an average yield of 5.43 percent. The move should boost net interest income by $1.7 million this year, the company said.

Central Pacific will release fourth-quarter earnings before the market opens on Jan. 31.